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DON'T
CRY FOR THE US DOLLAR
Jim Willie CB is the editor of the “HAT TRICK LETTER” Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe. The Bretton Woods II principal propaganda plank has been buried, with no fanfare, no eulogy on a moronic indefensible myth chapter. Asia no longer supplies credit to the United States debt monster. That mantle has been accepted by a combination of the Persian Gulf oil producers and the counterfeit press, each showing strain. The transition is truly deadly. Increasingly feisty, if not hostile, sheiks in the hotbed of the Middle East have become the last remaining pillar of USDollar support. If any prominent economist thirty years ago had taken the podium at a professional conference or political assembly and put forth a plan for the USEconomy to rest upon two pillars of credit supply, one being a printing press, that person would be condemned as a charlatan, a quack, a lunatic, a bird brain, an incompetent counselor hellbent on destroying the financial structure of the land where the beacon of freedom used to shine. Well, that is exactly what has happened, except this time, the process of flooding the system with phony fiat false money is hailed as a boon to investors, a solution to home foreclosures, and a source of tremendous profit for US corporations. We have come full circle from responsible competent economic counsel dating back to the 1960 decade to a guided path to truly cataclysmic Orwellian financial structures. We see the rancid bitter fruit of a USDollar suffering from debt constipation and economic sclerosis, whose supporting tree lacks the proper manufacturing branch burdened by increasing weight of baby boomer retirees. As the United States gradually becomes isolated on the geopolitical stage, for whatever reason, whether an unfortunate damaging twist of fate or inept aggressive leadership or a compromised Congress, the USGovt and US populace find themselves dependent upon what can be described as the ‘Weimar Engine’ in a highly precarious manner. The ongoing credit and debt explosion keeps the system running, keeps the rivers of money moving, while leaving the door open for fraud and granted gravy gathering by powerful insiders. Von Mises warned that at an end stage, an acceleration of money and debt will be necessary in order to sustain even flat growth. We are there now, here and now today. The Gross Domestic Product for 1Q2007 will be officially announced as almost flat, probably under 1% growth. Accept that number if you accept a 3% to 4% price inflation. Not here, not me, no way, no how! THE USDOLLAR BOUNCE Do not get excited about this USDollar bounce. It is feeble. It will be short-lived. Sure, a very short-term bullish stochastix crossover occurred, which was inevitable after the April important breakdown. Profit taking has been in progress. Let’s see if in a few weeks we learn that China has blunted this little bounce. The downtrend which began in November 2005 with a 92 high was followed by a long enduring breakdown which has not ended. The falling 20-week and falling 50-week moving averages testify to a powerful down trend which will not end until the critical support at 80 is tested repeatedly. Resistance will be seen at the 83 mark (20wMA), the 83.6 mark (trendline), and the 84.3 mark (50wMA). The DX index price is wrestling with the Nov2006 old support, now resistance.
Given the wretched fundamentals, the prospect of lower official interest rates led by the USFed (or followed by the USFed via endorsement), the ongoing strain of a shrinking bond yield differential, the impact spillover of the housing crisis and mortgage debacle, the USEconomy recession in progress (if reality is chosen), the USDollar will continue to plumb new lows, seek reaction from financial markets and foreign economies, and aggravate foreign central bankers who hold a growing mountain of USTreasury Bonds and other US$-based bonds such as corporates and agencies (mortgages). When the floor of support breaks, a near certainty, we will set the stage for gold to move toward $1000, and silver to move toward $20. The most recent kick in the US$ shins was doled out by Kuwait. Sheik Salem Adbelaziz al Sabah, governor of the Central Bank of Kuwait, announced its removal of a peg to the USDollar. He cited “detrimental effects of the pegging system to the national economy” which is a nice phrase for inviting rampant price inflation from a falling currency. The wider fear is that the Gulf Cooperation Council (GCC), the informal body which guides Persian Gulf oil producer policy, might began to endorse other regional oil producers to abandon support for the USDollar. Kuwait will apparently continue with 75% to 80% weight to the US$ in their dinar currency. The prospect for GCC currency union just received a knife in the back, since both Saudi Arabia and Bahrain recently reiterated their commitment to the US$ peg. The new denial is that other GCC nations will not follow suit. Of course they will. The United Arab Emirates, Oman, and Qatar are studying policy alternatives. Add this to the list of denials founded more firmly on our soil. Never dismiss the impact on the USDollar currency from the US Military standing down in its buildup and threat toward Iran. Hats off to CENTCOM commander Admiral Fallon, who just said no. The omnibus commander in chief might be an empty chair! The USGovt lost face. Russia and China make for powerful allies to Iran. Upstart Venezuela threatened retaliation also. Cooler heads in Europe might have influenced the aggressive weakened US leaders. And now Israeli leaders plan to meet and negotiate with the Arab League. Times are changing, but in the process, US leaders look weak, sure to generate lost confidence in the eyes are key foreign investors. The good side is that with cooler heads prevailing, come less immediate destruction in the Persian Gulf. LOUD SHRILL DENIAL The latest absurd chapter within the context of the USEconomic mythology is in the process of being written. A few weeks ago, an article of mine entitled “Death of Bretton Woods II” (click here) in late April made the point that a loud denial of the unfolding multi-faceted crisis would be the next manifestation. A new chapter of the profound corrupted and entirely heretic economic mythology would not follow, but rather a shrill denial of the unfixable problems which will crop up. The decline of the USDollar joins the housing crisis & mortgage debacle, as the currency devaluation inches closer toward the abyss. People and institutions are actually denying that a falling USDollar is negative. Never in modern history has a deep currency decline been a favorable development. Instead, it constitutes an international rejection of an economy, its financial markets, and faith in its leaders. The propaganda DENIALS have returned on how the weaker USDollar is not such a big deal, not the dire situation which it obviously is. If they are not propaganda, they are based in horribly incompetent and indefensible analysis. Check the motives from those who utter the denials, and you will at least notice a deep vested interest in a brokerage firm, a bank, a mutual fund, a private consultant, or a government agency. Here are several planks in their corrupted denial system founded in lies and rationalization, the newest echoes of US Mythology. MULTI-NATIONAL FIRMS & CURRENCY TRANSLATION THE DENIAL: Multi-national firms will enjoy a positive currency translation from their foreign operations. Sure, but the significant operations probably are inside the USEconomy, where all customers will be subject to rising costs uniformly. A rising proportion of the profits for Fortune 1000 companies are derived from foreign operations, just as a rising share of the growth in profits comes from favorable foreign currency translations. The natural reaction for big US firms is to expand their investment in foreign lands, to furlough workers in the United States, and to gradually even ship intellectual white collar professional jobs overseas. See the IBM announcement to ship over 100 thousand jobs out of the US. The trend upon distant continuation will leave the USEconomy a shell, its workers paupers, its lords wealthy, and the middle class nonexistent. This denial only testifies to liquidation of businesses, if not abandonment of US workers. See the business investment trends, and emphasis in foreign lands. PRICE DISCOUNT OF US ASSETS THE DENIAL: Price discounts to US stocks, bonds, housing, and other assets will attract more foreign buyers. That is backwards, as the trend has been down, discouraging foreign investors, as seen in 2006 figures which are loud & clear. A discount on asset price is noticed only after price stabilizes, which has not happened. Foreign investors will seize upon a bargain, to be sure, but they will not enter when the trend is down. The trend is for a falling USDollar, for better investment opportunity abroad, and shrinking capital flows. Just recently, the capital flows in March were down over 50% sequentially to $45 billion from $101 billion in February. The denial is easily shot down, as facts get in the way. ATTRACT TOURISM TO US THE DENIAL: The US tourism industry will thrive, as foreign visitors will flock to our shores. Sure, but that same effect obstructs US tourists from visiting foreign lands, leaving them trapped. The unusual sideshow of English and other European shoppers making trips to New York and other points east in order to conduct shopping tours to grab cheap retail items only points out how bizarre the situation has become. Talk about a dislocation and aberration! This denial might have some substance to it, but US citizens will probably surrender their travel plans altogether outside the country. Hey, Costa Rica is still a bargain, and nearby, pura vida! DIRECT FOREIGN INVESTMENT IN US THE DENIAL: Foreign investment in US corporations, or in US-based projects, will flourish. To do so, foreign firms must detect growing consumer strength. That goes against all trends in recent years, even months, as the US is the harshest environment for regulations, environmental standards, worker benefits & protection, federal taxes, and so on. So foreigners will invest here when US firms will not? Try again! Recent retail sales have fallen seriously. This denial is downright baseless and illogical, not to mention comical and nutty. WAGES OUTPACE INFLATION THE DENIAL: The price inflation has been tame, as price inflation has been less than wages growth. Again, such a claim flies in the face of all data. Wages cannot even keep up with falsified suppressed CPI figures. Official USGovt wage statistics report that inflation adjusted income has fallen since 2001. The wages fall behind prices by at least 6% to 8% per year, which is precisely why the Middle Class feels squeezed. This claim is based upon the actual price inflation problem, not the official falsified report. This denial is shot down the by USGovt itself. INFLATE DEBTS AWAY THE DENIAL: The US will have another chance to inflate our debts away. This is moronic, since debts are exploding, not being paid off, even as debt defaults occur, complete with bankruptcies and foreclosures. Expect more of the same. This plank is utterly moronic, and ignores all evidence of the past two decades. In fact, it is a repeating refrain from the corrupt clueless cast of economists, used every few years, never corroborated, as national debt levels of every type conceivable are on the rise, have been on the rise, and will continue to be on the rise for as far as the eye can see. This denial ignores all debt charts, which are parabolic upward in their paths, and create great systemic risks in their unsustainable course. This denial is like a national disease in thought process, to endorse debt. REDUCED IMPORTS ANYWAY THE DENIAL: The US does not import all that much anymore, what with all the Japanese carmaker plants operating inside our shores. This is to admire the placid antelope in your living room, calling it pretty, regarding at as safe, when in the center of the room stands a 400 lb hungry tiger eyeing the easy prey. The trade deficit is enormous, resuming its upward path. The current account deficit is 5.8% of the US GDP, having flirted with the mid 6% levels last year. The comment about carmarkers entrenched on US soil, hiring US workers, was made by the supercilious haughty Mark Haines of CNBC, who probably regards trade deficits as positive (after all, his training is as an attorney). He does not do much homework, since the Japanese carmakers are responsible for imports of many car subsystems like engines, transmission, brake systems, tires, and more, resulting in growth to the trade deficit. This denial ignores the recent trajectory of colossal Chinese bilateral trade deficits. A comment on recent trends. From June 2005 to June 2006, US exports rose by 13.5% versus a 12.4% rise by imports. That halted the trend seen since 2001, as the import growth had been roughly 50% greater relatively than the export growth. From end of 2005, exports are rising nicely at a 13.2% rate versus only 7.3% rise in imports. However, bear in mind that a slower USEconomy shows up in slower imports of consumer items. Higher costs for imported oil keep the imports rising though. This denial fails to comprehend the complexities of the trade deficit, which will vanish only if a deep recession or worse takes grip for a full decade, complete with millions of lost jobs and millions of bankruptcies and thousands of corporate failures and a big bank meltdown and a surefire derivative blowup. INCREASED EXPORTS EXPECTED THE DENIAL: The US will realize a tremendous boom in export business, as the USDollar offers price discounts for exported products to foreign customers. This is true, with a loud qualifier. Sure, expanding foreign economies have increased their purchases of some equipment and other products made in the United States. The tilt in business investment occurs abroad but not inside the US itself. Furthermore, the manufacturing base of the US is shrinking. Let’s examine the chief components of the US mfg base. 1) Carmakers are under great strain during a liquidation phase, as the Japanese become extraordinarily dominant. The Chinese are soon to export cheap cars. 2) Pharmaceutical firms do a gangbuster business in the US, but their exports are limited. The barrage of a dozen television advertisements per hour on US networks fails to cross the borders en masse into foreign penetration so as to generate export sales. 3) Electricity plants & gasoline refineries produce for domestic demand. It is a close battle which is in worse shape according to its infrastructure. Canadian hydro-electricity is imported along northern border locations, not exported. 4) Fast food restaurants, those purveyors of obesity, clogged arteries, high cholesterol, and otherwise bad health are now actually contributing to officially reported manufacturing job growth, with advances in statistical methodology yet to take root in mfg sector business growth. What foreigners want the most from US firms is technology and telecom, each somewhat protected and restricted for trade. The most coveted items are ultra-fast computer and network systems, which the USGovt in its wisdom refuses to permit in large sales to some developing countries like China. They are free to buy more Boeing aircraft though, and do, to the point of a condition ad nauseum. SYMPATHY UNDESERVED The issue of showing sympathy has been raised by certain folks, as one regards Uncle Sam needing cooperative partners, institutional assistance, even some sympathy during a stressful time of need. The symbol of the aging empire should be supported in its time of stress, some claim. Sorry, but he don’t qualify for sympathy, kind words, helpful hands, or the benefit of the doubt. No way! The actions and policies in recent years, even past three decades, has been at best aggressive and controlling, at worst shameful and destructive. Liberties oftentimes are being entirely denied. The spectrum of its recent history can be recounted, at best for posterity, at worst for indictment.
Sympathy for a crippled weakened leader? Not a chance. This is a bully in the schoolyard. This bully does not earn his keep, spends like a drunken sailor, angers his own friends, takes lunch money from other kids. This bully expects a free ride, continued privilege, believes in 'full spectrum dominance' without regard to treaties, who answers to nobody, not even Congress of the American people. This increasingly aggressive and hostile creature expects total control without any checks & balances merely because of the pedigree of being Americans. Why should any thinking aware caring person show sympathy or respect for a man who contracts a nasty case of poison ivy in his private parts below the belt, when he obtained the problem during the rape of an innocent young girl who was walking home, pulling her into the heavy weeds behind the bushes? To expect sympathy is out of place. Why should any cognizant well-informed alert observer show sympathy or respect for a man who breaks his hand and wrist, when he developed the problem attempting to punch someone in the face but missed and hit a post instead? To expect sympathy is absurd. CONCLUSION One can be constantly be amazed by the denial systems. As the Bretton Woods II mythology dies out, look for blatant shrill deafening wrong claims to surface. Out of the rubbish best described as ideological mumbo jumbo propaganda, new planks will be erected which serve as the new mythology. No new myth system has rushed into the vacuum, but rather silly baseless denials about the USDollar decline have come into earshot. The powers that run the carnival will attempt to fashion new myths into a new economic foundation, but eerily they are quiet. Nowhere is Greenspan, the revered architect of financial catastrophe. They will try to create a new set of beliefs eventually, but they tap an empty wellspring of ideas. Tragically, they will try to launch a vessel which is grossly unseaworthy. Like the Coast Guard vessels designed by an entrenched military contractor for security on the high seas, the subject of recent controversy and more Congressional hearings. Its communications gear (like radios) is not water proof, its video security monitors do not cover the helm, its highest speed is inadequate to keep pace with the fleet they supposedly are to join. Those who can, they work. Those who cannot, they teach. But the truly inept and incompetent and corrupted, they govern. Those who enjoy fiction, they run the media & press networks.
The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
Jim
Willie CB is a statistical analyst in marketing research and retail
forecasting.